Determining the Optimal Scale of an Operation
The size at which a company should attempt to establish its operations depends on the extent of the scale economies and the extent of the market. Some firms can operate at minimum unit cost using a small scale. Consider a licensed street vendor of leather coats. Each additional sale entails variable costs for the coat, a few minutes of direct labor effort to answer potential customers ’ questions, and some small allocated cost associated with the step-van or other vehicle where the inventory is stored and hauled from one street sale location to another. Ninety-nine percent of the operating cost is the variable cost of an additional leather coat per additional sale. Long-run average cost will be essentially flat, constant at approximately the wholesale cost of a leather coat. As a result, in street vending, a small-scale operation will be just as efficient as a large-scale
operation.